Buffett’s China-Gushing Optimism Sells Like Sex: William Pesek

Warren Buffett says China’s BYD Co. has “momentum.” It may have more to do with his name than the company’s.

Such is the power of the most famous investor. Buffett, worth $47.5 billion, according to Bloomberg data, homes in on a Shenzhen automaker and its stock heads for the stratosphere.

This dynamic works both ways. Add a China element to any company or trend, and success is virtually assured. China is the economic equivalent of sex -- it sells. Buffett knows how dabbling in Asia’s hottest economy makes headlines. He also knows how to turn on the charm, as he did in China last week.

The marriage of Buffett’s suddenly unbridled optimism and China’s perceived invulnerability is a fascinating milestone. Just two years after pushing a “buy American” campaign, Buffett is leaning toward a “buy Chinese” one.

In reality, the Buffett gush-fest is a reminder of the precariousness of the global economy. It’s one in which the biggest economies and the savviest investors may be relying too much, too soon, on a developing nation.

At roughly a third the size of America’s, China’s economy has a way to go to dominate the rest of the world. Yet Goldman Sachs Group Inc. claims that China will surpass the U.S. by 2027 has morphed into a given. And dangerously so.

It’s possible that China won’t experience a major crisis in the next 17 years. It’s still highly unlikely. For a generally poor nation at China’s level of development, 5 percent growth would be such a crisis.

Buffett’s Opportunities

Enter Buffett, who said China’s progress is unlike anything “in history” and that he expects “large” investment opportunities. Given China’s success at raising hundreds of millions out of poverty and steering around the global crisis, betting against it sounds like a fool’s game.

Also, a country that is run like a company has great appeal to a value investor. With each impressive gross-domestic-product figure, we see investors, banks and corporate executives toss even bigger bets China Inc.’s way. We seem not to care how it’s happening, whether it’s sustainable or what laws are violated.

Just as with BYD, expect Buffett’s name to be used to justify fresh speculation of China’s unstoppable economy. China’s latest bubble seems to be in the idea that nothing can go wrong. Here, BYD may be an intriguing microcosm of China.

Never Mind

Never mind the specifics of China’s boom or risks ranging from excessive pollution, bad loans and instability. Never mind which World Trade Organization rules are trounced in the process, which regional agreements about territorial claims are blown off, which despots are financially supported to win access to national resources, which websites are banned or how an undervalued currency is damaging job creation in other developing nations.

As long as China grows 10 percent, all’s well? Nope. The vast majority of Chinese don’t live near the skyscrapers, five- star hotels and swanky restaurants of Shanghai or Beijing. They are largely poor and their purchasing power is curtailed by a currency policy that helps the billionaires. The widening rich- poor divide is a major risk to stability in an economy that recently surpassed Japan’s.

Count BYD Chairman Wang Chuanfu among the ranks of the wildly rich. For him, Buffett’s $232 million investment in 2008 was a winning lottery ticket. Berkshire Hathaway Inc. Vice Chairman Charles Munger told CNBC that BYD may become one of the most successful companies that “ever existed.”

Broken Promises

That sentiment isn’t universally shared. BYD is having trouble living up to the hype. Its F3 sedan, China’s best- selling car in 2009, could be mistaken for Toyota Motor Corp.’s Corolla. It won’t deliver electric cars to California this year as promised. And its E6 car will get about 100 fewer kilometers out of a six-hour charge than the company announced at the Detroit auto show in January 2009.

Terry Gou, chairman of Foxconn Technology Group, which makes parts for Apple Inc. iPhones, accuses BYD of stealing trade secrets. That, Foxconn claims in court documents, helped BYD double revenue from its handset business from 2005 through 2007. BYD countersued, claiming Foxconn gathered false evidence and conspired to hurt its business.

Gou is critical of Buffett, too. “He doesn’t know the technology,” Gou told Bloomberg Businessweek last month, referring to the batteries used in electric vehicles and plug-in hybrids. “He just used his name to speculate on the stock.”

Complacency Risks

Also, China’s Ministry of Land and Resources is investigating BYD over the illegal use of farmland it agreed to buy in Xi’an from a local economic-development agency.

Anyone who stops by China can’t help but be wowed. Its high-speed trains and airports make America look like a theme park celebrating antiquated technology. The confidence of China’s business elite is underpinned by booming growth, $2.5 trillion of currency reserves and 1.3 billion people determined to become wealthy.

The risk is that optimism feeds complacency about China’s daunting challenges. It’s also that we latch on to China as a growth engine before we know what will become of it. Buffett may be the Sage of Omaha, but predicting China’s trajectory is beyond even sages in Beijing.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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